On Aug. 3, 2018, U.S. Departments of Health and Human Services (HHS), Labor (DOL), and Treasury issued a final rule to extend the length of time individuals may use short-term, limited-duration (STLD) health plans. The federal departments issued this guidance in response to President Trump's executive order in October 2017, which directed the agencies to consider regulations revising guidance on the coverage period for STLD health plans and their renewal. In February 2018, the agencies proposed rules and accepted comments. The final law makes some modification to the proposed rule.
STLD plans intended to fill temporary gaps in coverage
In general, STLD health plans are intended to fill temporary gaps in coverage, such as when an individual makes the transition from one health plan to another. Federal law does not regard STLD plans as individual health insurance, so they're not subject to the market reforms of the Affordable Care Act (ACA).
STLD plans are not new; they predate the ACA. In 2016, the Obama administration shortened their length of duration, including renewals, to less than three months. This action came in response to concern that some people were using STLD plans to circumvent the ACA's market reforms and consumer protections. The Obama administration limited the plans' duration to mitigate the potential to segment healthier people from the general individual market, creating adverse selection.
The three-month duration for STLD plans coincided with the ACA's individual mandate provision that allows individuals to go without ACA-compliant minimum essential coverage for up to three months per year without facing a tax penalty. STLD plans would subject policy-holders to potential assessments under the individual mandate, since they don't meet the ACA's minimum essential coverage requirements. However, the GOP tax plan that President Trump signed into law on Dec. 22, 2017 reduced the ACA individual mandate to $0, effective January 2019.
Overview of the final rule
The final rule on STLD plans takes effect Oct. 2, 2018. The rule:
- Extends the duration of an STLD plan from less than three months (including renewals) to less than 12 months, with the option to renew for a total of 36 months without further underwriting.
- Maintains states' authority to regulate STLD plans. Some states either prohibit STLD plans or limit them beyond the final rule's maximum periods.
- As before, policy issuers can require underwriting before any renewals — meaning, for example, they can deny applicants with pre-existing health conditions.
- Revises notice requirements that must appear in the contract or application, to help consumers understand that:
- The plan does not offer ACA-delineated minimum essential coverage and is therefore not ACA-compliant; and
- The plan may not contain some common benefits, such as maternity coverage.
- Because the ACA's individual mandate penalty drops to $0 in 2019, individuals with STLD plans in the last few months of 2018 would be subject to a tax penalty under the assessment unless the policy holder qualifies for an exemption. Insurers would have to publish this fact in the notice requirements prior to 2019. After 2019, there is no tax penalty for having an STLD plan.
- Qualified small-employer health reimbursement arrangement (QSEHRA) plans can't be used to purchase STLD plans. QSEHRA specifies that plans purchased must be considered minimal essential coverage. The final rule reiterates that STLD plans do not meet the ACA's minimum essential coverage requirements.
- STLD plans are not subject to medical loss ratio requirements. Consequently, insurers can use more money for administrative expenses, including broker fees and commissions. Brokers may have had fees for sales in the individual insurance market limited by medical loss ratio requirements, and thus they may benefit from promoting STLD coverage instead of traditional individual insurance products.
- Because STLD plans are not subject to the ACA's consumer protections and market reforms, they tend to offer less coverage and cost less than ACA-compliant products. Industry watchers worry that healthier or less-informed consumers will gravitate toward STLD plans based on price. If enough younger, healthier people leave the individual insurance market to purchase STLD plans, premiums for standard coverage in that market may rise.
- HHS, DOL, and Treasury in the final rule acknowledge states' authority to regulate the business of insurance. The rule does not preempt any state laws prohibiting the sale of short-term, limited-duration insurance.
- States have a lot of room to prohibit or limit STLD plans beyond what's in the federal regulation. We anticipate seeing new laws from states. However, given the rule's swift implementation at a time when few state legislatures are in session, it's unlikely that many will be able to respond this year.
- Several states already limit STLD plans beyond the new federal floor of 12 months’ duration and a contract total of 36 months. For example:
- New York, New Jersey, and Massachusetts have regulations that essentially prohibit STLD plans.
- Arizona limits STLD plans to 185 days, with renewal up to an additional 180 days.
- New laws enacted in Maryland and Vermont similarly limit the duration of STLD plans and prohibit renewal.
- In the final rule, the departments commented that states may be able to provide subsidies to individuals who buy STLD plans using 1332 waivers (in general STLD plans don't qualify for premium tax credits, but the waivers are designed to redirect federal funds for these to a state-designed plan). However, the federal government imposes significant requirements to obtain a 1332 waiver, including a requirement that the coverage be as comprehensive as an ACA-compliant plan.
- Some states, such as New Jersey and Massachusetts, have established an individual mandate to deter individuals from purchasing STLD-type coverage. Other states have proposals to institute one in their jurisdictions.
Rule may have indirect impact on employers
Employers may feel a significant indirect impact from the rule. Combined with the removal of the individual mandate penalty and new legislation that expanded association health plans, the rule will affect health insurance markets nationwide. If premiums increase in the individual market, people who don't qualify for premium tax credits may push their employers to provide health coverage.
As noted, state rules will ultimately determine the effects of the new STLD policy. States that prohibit, limit, or discourage these plans may see little change in their markets. However, the federal government is again charging the states to develop solutions to support the needs of their populations. In the years to come, states' responses may affect employer-sponsored insurance markets in some jurisdictions.
Keep an eye on STLD plan requirements in your region
Employers should stay informed about STLD plan requirements in their geographies and how they may affect the healthcare needs of their workforce. As the labor market tightens, the benefits you offer employees become increasingly important.